WHEN BUYING A FRANCHISE, THINK BEFORE YOU CONVERT
Feb. 25, 2013
When buying a franchise, think before you convert your existing business to a franchise. If you have an existing business, you may discover opportunities to convert your business to a franchise–to get the benefits of a “well known brand”, to gain “purchasing power”, or to gain advertising and support. You may even be tempted because of the attractiveness of the package.
Such conversions probably occasionally work out well for the franchisee–but often they do not. As part of such conversion agreements, you probably are transferring (giving) all of your current customers and their information to the franchisor. In most cases, if the franchise ends for any reason, you have no right to even contact any of those customers–and you will probably be prohibited from being in the business you have been operating for years without their help–we call it a non-compete. It is rare that franchisors pay for such benefits–except the somewhat illusory “right” they give you to sign their franchise agreement. Meanwhile, by signing the franchise agreement, you give up a great deal of the flexibility you now enjoy to control the products and services you offer to your customers and the direction of your business.
In this situation, we cannot give a bright line rule. You should discuss your decision with an experienced franchisee lawyer. He or she should be able to advise you as to the risks specific to your situation. The longer you have been in business, the greater the risk in most cases. An experienced franchisee lawyer might also be able to help you negotiate some of the terms of the franchise agreement. Yes, franchise sales people say they are non-negotiable, but that is not true. They want your money. If they want it bad enough, they will agree to some simple changes that might protect you in case things do not work out. For example, they might waive the post-term non-compete under certain circumstances or pay for your customer list or make other concessions. They might even agree to exclude your existing customers from royalty calculations.
If you do not think very carefully and listen to some good advice, you could lose not only your franchise, but the business you worked to build before you learned about the franchise “opportunity”. You could discover, after it is too late, that you now have to pay royalties on all of your existing customers–but that new brand and all the promised advertising and support has not delivered new customers. Take your time and think before you convert.